What is fiscal sponsorship?

Fiscal sponsorship is when an established 501(c)(3) organization, known as a fiscal sponsor, serves as the recipient of funds for a charitable endeavor, usually called a project, and issues receipts to donors accordingly. In a fiscal sponsorship, the purpose of the project must be mission-aligned with the charitable purpose of the fiscal sponsor. In a fiscal sponsorship the fiscal sponsor must maintain full discretion and control over the funds, but the project may be involved in operations on a daily basis.

When might a charitable project use a fiscal sponsor?

A charitably-oriented endeavor often seeks a fiscal sponsor when they are not yet ready to strike out and form their own nonprofit, yet could benefit from fundraising support from the general public. The advantage of a fiscal sponsorship is using the established 501(c)(3) status of an organization for the receipt of public donations, which are then applied to the project’s particular purposes in alignment with the 501(c)(3) sponsor’s own charitable purposes.

What are some common questions about fiscal sponsorship models?

Projects may wonder how an agreement should be structured with their fiscal sponsor. Three common structures include Model A (sponsor holds comprehensive authority over the project), Model B (project is an independent contractor of the sponsor), and Model C (the sponsor makes recurrent grants to the project). Choosing the right model depends upon the goals contemplated by the project.

Can a project leave its fiscal sponsor and start its own nonprofit?

Typically yes, but pitfalls may arise when a project wants to split off from its fiscal sponsor and establish its own tax-exempt 501(c)(3) organization. Concerns can come up with respect to who owns the intellectual property (such as webpages or logos of the project), and what funds will be transferred to the project when it has its own tax-exempt status. A well-drafted written agreement is important to ensure that a spinoff from the fiscal sponsor goes smoothly.

What are some issues that come up with fiscal sponsorships from the perspective of the sponsor?

Sponsors may be concerned that their fiscally sponsored projects have too much control or authority over the projects that could subject the sponsor to liability. Questions can arise with respect to who holds insurance that will cover the project and who is responsible for staff or contractor relationships. Sponsors may also wonder what is an appropriate fee to charge for the level of support they are providing through the fiscal sponsorship, especially in light of whether the sponsor is simply issuing receipts or providing more of a comprehensive oversight role over the project.

What types of agreements are important in fiscal sponsorship arrangements?

Fiscal sponsorship arrangements benefit from a written agreement setting out any fees associated with the fiscal sponsorship, the process for termination if the project becomes its own 501(c)(3) organization, and provisions regarding intellectual property. This written agreement is usually entered into by both parties at the beginning of a fiscal sponsor relationship to set out each of their rights and obligations. Sometimes, a separate termination agreement is helpful to set out the process of transferring funds from the fiscal sponsor to the project when the relationship ends.

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Jova Law counsels clients on all elements of fiscal sponsorships and has served as the attorney for both sponsors and projects. Please feel free to reach out to one of our Massachusetts-based fiscal sponsorship attorneys here.

Learn more about our Tax-Exempt Organization Compliance and Nonprofit Contracts & Agreements practices.

For new developments on fiscal sponsorships, please find information on the U.S. Department of the Treasury’s Form 990 Transparency Initiative here.